March 13, 2007- The International Finance Corporation (IFC) announced today the release of a new IFC publication, “ILO Convention 169 and the Private Sector: Questions and Answers for IFC Clients.”

The ILO Convention 169 and the Private Sector (PDF, 90kb) publication is intended as a practical guide for IFC clients who operate in countries that have ratified Convention 169 on Indigenous and Tribal Peoples. It is the first guidance of its kind written for the private sector in relation to Convention 169 which is directed at governments. IFC prepared this publication, in close consultation with the ILO, in response to the experiences that IFC has had in recent years with private investments affecting indigenous peoples and their lands in Latin America.

IFC hopes this publication will help to raise awareness about the Convention and its possible implications for private sector companies, and provide added clarity and guidance for IFC clients. The publication should be read in conjunction with IFC’s Performance Standard on Indigenous Peoples.

Investment rose from from USD 30 billion in 2004 to USD 38 billion in 2005. A REN21 report estimates that at least 85 renewable energy companies or divisions have market valuations greater than USD 40 million, up from 60 companies or divisions in 2004. The estimated total market valuation of companies in this category is USD 50 billion, double the 2004 estimate, as several high-profile initial public offerings have recently taken place. The solar PV industry invested record amounts in new plant and equipment (about USD 6 billion), as did the biofuels industry (more than USD 1 billion).

In the last year there were many new policies adopted to support renewable energy, and several more were extended, revised, or discussed. Not only were the EU and US active, but more than 16 developing countries as well, including Brazil, China, Egypt, India, Mexico, Thailand, and Uganda.

A number of countries dramatically stepped up targets and mandates for biofuels – ethanol and biodiesel mixed with conventional fuels. The number of countries with “feed-in” policies for the purchase of power from renewable sources increased to 41, and the number of countries with future targets for the share of energy from renewables increased to at least 49.

As this situation demonstrates, once banks sign up to the Equator Principles Banks their finance decisions and come under greater scrutiny. While EP banks generally apply more stringent environmental and social policies than other financial institutions, NGOs increasingly use the Equator Principles as a means to place increased pressure on EP banks not to finance projects that the NGOs consider to be environmentally and socially unacceptable.

In the face of this third party pressure, the EP banks need to consider the specialist environmental and social reports prepared by their consultants to make a fully informed decisions. This will ensure their finance decisions are based on the scientific evidence, opposed to responding to excessive pressure. Particularly, if these reports indicate that the risks can be managed in an acceptable manner and the project sponsor demonstrates a clear comittment to improving their environmental and scoial perfromance.

Conversely, NGOs need to recognise that project finance provides opportunities for substantial economic improvements and simply not financing a project may not be the best way of managing the environmental and social risks – after all you can have a greater influence from the inside opposed to the outside.

While the anticipated increased scrutiny may make financial institutions think twice about signing up to the principles, the additional risk management the EPs provide and the shareholder support for such actions can be expected to make it worthwhile.

An example of the ongoing pressure placed on EP banks – this project is considere by many to be a tesing ground for the effectiveness of the Equator Principles:

Thursday May 18th, 2006 – Nine organizations including broad civil society networks in 6 countries, filed a complaint today against Calyon, the international financial investment arm of Crédit Agricole of France, for violations of the Equator Principles, in Calyon’s support of the highly controversial Finnish papermill in Uruguay in construction by Botnia. The complaint was modeled after an earlier complaint presented to ING Group of Netherlands, soon after which ING withdrew US$480 million in pledged support to Botnia. The filing will be followed by public protests outside of the French Embassy in Buenos Aires, the headquarters of Calyon and Crédit Agricole in Paris, and launches what will be a rigorous international campaign against Calyon and Crédit Agricole to withdraw its support to the mills being constructed on the Uruguay River, the natural waterway border between Argentina and Uruguay.

The complaint was discussed and prepared in collaboration between the 9 institutions, in 6 countries and consists of 17 pages of evidence that Botnia does not comply with the Social and Environmental Safeguards of the International Finance Corporation (IFC), and suggests that if Calyon finances Botnia, it will be complicit in violations of human rights and environmental law.

London, 1 June: The European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD) have signed a declaration promising to apply the EU’s principles on environmental protection to project financing.In order to secure a loan from the banks, a project should now adhere to the European Principles for the Environment (EPE), which are based on EU environmental legislation and the environmental principles enshrined in the treaties underpinning the EU.

However, campaign groups are already saying that the declaration does not go far enough, because the requirement is subject to the banks’ environmental policies and, outside of Europe, subject to local conditions.

Stoczkiewicz also expressed concern about how the principles would be applied to projects financed by the EIB in Latin America and Asia. “These conditions will not necessarily come from the country’s legislation or the country’s government itself,” she said.

Arango said that it would not be practicable to expect projects in developing countries to adhere to some EU legislation. He said: “We do not go down the line of dumping environmental externalities on developing countries. When you go into developing countries, you have to be realistic.”

Clearly it is important for EP banks to turn away projects that are unsuitable on environmental and social grounds, as this is an important function of the Equator Principles. Equally, Financial Institutions should not be pressurised into avoiding all high risk projects, it needs to be recognised that in some cases banks with a reasonable appetite for risk can work with their clients to build capacity and transform unsuitable projects into environmentally and socially acceptable ones, and that this transfer of knowledge can have longer term benefits.

Dutch banking giant ING announced that its participation in the 1.7 billion USD controversial paper mill project of Finnish company Botnia in Uruguay "is no longer under consideration". The paper mill has been strongly criticized in Uruguay and Argentina for its severe negative environmental impacts. The ING Group had an advisory role to the company and was to arrange a USD 480 million loan package from private banks for the project.

"The paper mill is exactly the sort of project that should not pass the Equator Principles test. At a time when major banks debate a revision of the Equator Principles it is a very welcome signal that ING took its social and environmental responsibilities seriously" said Johan Frijns, coordinator of BankTrack.

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Risk in Project Finance

This site considers current news, key issues, articles, and new regulatory and guidance information from different viewpoints, including banks, legal firms, project sponsors, consultancies and NGOs in order to provide a wide spectrum of opinions.
In order to demonstrate why risk management so important, the site provides information and conflicting opinions from those who support and oppose the finance of key project. It also includes an evaluation of the different views on the various management techniques.

Financial Institutions

The various approaches and guidelines have provided invaluable risk management tools for Financial Institutions, and while there will always be critics of some of the finer details, the overall benefits have been overwhelming and far reaching. The banks have shown a highly impressive degree of co-operation and innovation in their approach to environmental and social risk management.